Recent EU and Luxembourg anti-BEPS developments extending to third countries

Tax Alert

EU Commission's ATAD proposal released

On 25 October 2016 the EU Commission presented yet another package of corporate tax reforms comprising, inter alia, a proposal on tackling "hybrid mismatches" between the tax systems of Member States and non-EU countries (Proposal) through amendments to the Anti-Tax Avoidance Directive (EU) 2016/1164 of 12 July 2016 (ATAD). The Proposal is mainly an embodiment of the BEPS Action 2 "Neutralising the Effects of Hybrid Mismatch Arrangements".

In principle, hybrid mismatches occur when countries treat the same financial instruments or entities differently for tax purposes. The ATAD currently deals with certain hybrid mismatches solely between the Member States of EU. The Proposal enlarges the scope of the ATAD:

to include imported mismatches, hybrid transfers, dual resident mismatches to fully align it with the BEPS Action 2 as well as hybrid permanent establishment mismatches

to cover hybrid mismatches with non-EU countries

Moving forward with the Proposal requires unanimous approval of all Member States of EU. After approval by the Member States, the Proposal will need to be implemented into their national laws by 31 December 2018 with an effective date as from 1 January 2019.

As a preliminary step multinationals will need to identify hybrid mismatches in their structures and to anticipate potential risks. Actual restructuring steps should be carefully reviewed and coordinated by the tax teams of all jurisdictions involved to ensure that restructuring is handled in a consistent manner. It also remains to be seen how the tax authorities of the Member States will interpret some specific situations like those involving a deferral of inclusion of income (which may arise due to differences in accounting and tax systems) in the light of the hybrid mismatch definition. The approach to be taken by the tax authorities of the Member States in this respect will have a significant impact on existing structures with US taxpayers leading to a tax deferral in the US.

US-Luxembourg tax treaty amendments: latest

On the same topic, on 22 June 2016, Luxembourg and the US announced an agreement to amend the US-Luxembourg tax treaty to put an end to the Luxembourg-US finance branch structures that utilized a permanent hybrid mismatch structure (not taxable neither in US nor in Luxembourg). On 27 October 2016 the Council of State of Luxembourg in its opinion concluded, that the proposed Luxembourg bill of law amending the US-Luxembourg double tax treaty with a retroactive effect (Bill of Law) contradicts the Constitution of Luxembourg, the Vienna Convention on the Law of Treaties and the general principle of legal certainty. However, the Parliament of Luxembourg may not necessarily abide with the opinion of the Council of State and still vote for the Bill of Law, which would constitute an exceptional event.

In any case and regardless of the timing for the change of the US-Luxembourg double tax treaty, the US Branch structures commonly used for US financing structures would have disappeared before 2019 pursuant to the amended ATAD (assuming the Proposal is approved).

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DLA Piper is a global law firm with lawyers located in more than 40 countries throughout the Americas, Europe, the Middle East, Africa and Asia Pacific, positioning us to help clients with their legal needs around the world.

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